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Stockmarkets: Where is the bottom?

Apr 20, 2005

This is definitely one question that will be at the top of every investors mind in the current scenario. In fact, it shouldn't be of surprise even if the non-equity investors are wondering as to at what levels will the markets find ground, considering the kind of interest the stock markets have been generating in recent times, be it for they scaling all-time highs, be it for the stupendous returns that have been offered by IPOs or be it for the biggest fall last week since the mayhem of May 17, 2004. Apart from this, another question that must be haunting investors, especially those who have been the unfortunate ones to invest at the peak, is, now what?Coming back to the moot question, where is the bottom? The answer is simple: nobody knows! In fact, we believe that people who claim to know the answer to this most sought after question, are seldom right. This is vindicated by the fact that these were the very people who had 'predicted' Sensex levels of 7,000, 8,000, etc. in good times. We are not saying that these levels are not possible, all we are pointing out is the fact that 'predicted' Sensex levels change with market sentiments. Human nature we guess!

Investors must note that it is very difficult to pin point market sentiments and what can affect the same - both positively and adversely. We say this because, considering the recent market behaviour wherein, despite the respectable numbers declared by Infosys last week, the stock has been hammered. Moreover, we fail to understand that if it was Infosys' results that is being blamed for the bear carnage in the last one week, owing to they being below market expectations (which actually is not true, considering the positive views having emerged in the market post the results), why is that an SBI or a Cipla have lost 15%! We believe that the current market correction is just an over-reaction with a certain faction of the markets making Infosys a scapegoat for the fall.

In fact, investors must note that the real reason for the aggravated fall since last week has been a meltdown across global stockmarkets. Among the Asian market indices that lost about 5% or more in the last one-month are Japan's Nikkie (7%), Indonesia's Jakarta Composite (7%), Korea's Seoul Composite, Taiwan's Taiwan Weighted and Thailand's SET (all 5% each). The US markets i.e. the Dow and the Nasdaq also lost 5% in the period. And akin to the Indian stockmarkets, most of the losses have come in the last one-week. The reason being cited for this is a possible world economic slowdown on the back of high global crude oil prices and hardening interest rates, which would impact corporate profitability.

However, amidst all this, we re-iterate our stand that for the long-term, Indian equities is an attractive investment option for reasons put forward by us time and again. At the current juncture, the Sensex is trading at 15x its trailing 12-month earnings, which implies valuations of 12x-13x its FY06 earnings. This is by no means 'unattractive'. However, investors must note that while the current valuations may not exactly be 'cheap', investments in equities need to be considered only with a long-term horizon. This is because, while year-on-year earnings growth may remain volatile owing to various domestic and global factors, the compounded annual earnings growth portrays the real story, which is at about 17%-18% CAGR for the Sensex companies over the last decade. And, this includes years of poor monsoons, poor reform implementation plans, business confidence setbacks owing to various global/domestic events, etc.

Key indices over the month: FMCG weathers, Metals wither
IndexAs on Mar 18 (Rs)As on Apr 19 (Rs)% change m-o-m
BSE FMCG1,048 1,055 0.7%
BSE-5002,837 2,615 -7.8%
BSE AUTO2,762 2,546 -7.8%
BSE HEALTHCARE2,660 2,439 -8.3%
BSE OIL&GAS3,207 2,940 -8.3%
BSE-200900 825 -8.4%
BSE-Sensex6,700 6,135 -8.4%
BSE PSU4,480 4,091 -8.7%
BSE BANKEX4,093 3,662 -10.5%
BSE IT2,686 2,346 -12.6%
BSE METAL6,853 5,677 -17.2%

In fact, apart from the fact that we remain positive over Indian equities and do suggest a staggered investment approach in the same, we believe that the current correction has thrown up ample opportunities for investors to bottom fish some fundamentally sound stocks at decent valuations. As can be seen in the table above, while metals, IT and banking stocks have been the bear favorites in this correction, FMCG stocks have relatively weathered the storm, which is very much in line with their defensive characteristic.

We would like to re-iterate here that Indian indices would see newer highs. Whether its today, or a month or a year or years down the line that we do not comprehend. But then if you are not looking to time the markets and are looking at a investment avenue that beats inflation and most other investment avenues in terms of returns, then look at investing slowly but surely in quality companies' backed by fundamental strengths, which would provide steady returns irrespective of the market movements. And stick with your investments for a longer horizon (ignoring market movements) for it does not help you, if you continually enter and exit stocks (as it only fattens your broker's purse and gives you tax worries). In the end, most likely, the strategy will result in peace of mind and give you a clear perspective and control over where your financial goals are headed.


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